Like the heroine from the silent film saga, "The Perils of Pauline," the American economy faces yet another danger: underfunded corporate pension plans.
The traditional pension plans offered by 360 of the 500 companies in Standard & Poor's 500 index are underfunded by about $243 billion, according to a study by Credit Suisse First Boston. These companies will have to make this up in the years ahead by cutting costs, investing less, or paying smaller dividends.
"It's another element of the fallout from the bear market," says Paul Kasriel, an economist with Northern Trust Co. in Chicago. "It's a drag on the economy."
A large chunk of the money in pension funds was tied to the stock market. But unlike Pauline, the funds haven't been rescued by a hero. A major upturn in stock prices certainly would help.
Yet the funding shortfalls are not a big threat for most of the 34 million retirees or employees in the United States covered by traditional "defined-benefit" pensions. These plans are insured by the Pension Benefit Guarantee Corp. (PBGC) should their firms go bankrupt. The government agency covers pensions, up to a limit $42,954 per year for a 65-year-old worker retiring this year.
"Thank God!" says Alicia Munnell, a pension expert at Boston College. "The PBGC is going to be sorely tested in the years ahead."
So far, the PBGC is in good financial shape. As of June 30, it had a surplus, measured on an actuarial basis, of $4.8 billion. That's down from $9.7 billion at the end of fiscal 2000. This surplus is likely to shrink further with the current wave of corporate bankruptcies. The agency was paying the pensions of 268,000 retirees at the end of fiscal 2001. By now, that number has probably risen to close to 400,000.
Nonetheless, the PBGC has enough cash to pay benefits for "the foreseeable future," says spokesman Jeffrey Speicher.
The 1990s boom helped the PBGC move into the black six years ago. Before then, it had operated in the red for 22 years, using premiums paid by firms for pension insurance plus any assets on hand to cover benefits.
For some big companies, the underfunding of pensions presents other problems. Last month, Standard & Poor's downgraded debt issued by General Motors to BBB, a grade just two notches above junk status. A major reason for this humiliation was that GM's pension underfunding is expected to rise to more than $21 billion at the end of the year, up from $9 billion last year.
That's happening despite a $2.2 billion injection by GM into its $67 billion pension fund this year. That additional cash equates to more than $400 per car sold this year. That's money that can't be invested into new models or paid in dividends.
Somewhat less underfunded are the pension plans of the other big American auto companies Ford and Chrysler.
IBM is also underfunded. In announcing third-quarter earnings, it said it would add $1.5 billion annually over the next three years to fully fund its pension plan by 2005. That represents about 20 percent of IBM's free cash flow in the past four quarters.
"Ouch!" exclaims Mr. Kasriel. "Less left over for Big Blue to use for stock buybacks."
During the stock-market boom of the 1990s, many companies were able to add the excess funding in their pension funds to operating earnings. Though the money had to be actually left in the pension fund, it made the books look good.
Because of today's low interest rates, stock-market blues, and funding rules, many firms now will have to trim the projected earnings rate of their pension funds, often about 9 percent. That will compound the underfunding problem.
There are incentives to keep up pension funding when possible. If a company's plan is less than 90 percent funded for two of the past three years, it must pay the PBGC an extra annual premium of $9 for every $1,000 of underfunding. And it must inform employees of the underfunding.
Over the past 15 years, defined-benefit pension plans have declined in importance. There were 112,000 such plans in 1985 and only 35,000 last year. The drop is attributed to more and more companies switching to cheaper, defined-contribution plans, like 401(k)s. With these plans, the employee takes the investment risk, not the company. The assets in these plans are portable. An employee switching jobs can take them along if he or she does the paperwork. But they are not insured.
With stock prices down, and Republican plans to privatize Social Security on hold, some Americans are concerned about the security of their retirement nest eggs.
Paul Weinstein, an economist at the Progressive Policy Institute in Washington, is promoting a universal pension plan to help the 50 percent of Americans with no pension aside from Social Security. It would be subsidized by government and simplify the present complex system. A few key Democrats have taken up the idea, introducing legislation, even using it on the campaign trail. But it's a long way from reality.